Escalade, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter ended October 6, 2012; year-to-date figures cover the nine months ended that date. Financial amounts below are in millions of dollars unless otherwise noted. The company manufactures and distributes Sporting Goods and Information Security and Print Finishing products.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $34.206 | $28.734 | $106.800 | $97.582 |
| Gross margin | 32.0% | 28.9% | 31.7% | 32.0% |
| Operating income (loss) | $(10.387) | $(0.855) | $(4.956) | $3.929 |
| Net income (loss) | $(11.503) | $(0.380) | $(8.840) | $2.308 |
| Diluted EPS | $(0.85) | $(0.03) | $(0.66) | $0.17 |
- Revenue increased 19% in Q3 and 9% year to date, driven by Sporting Goods. Sporting Goods revenue rose 27.0% in Q3 and 14.7% year to date. Information Security and Print Finishing revenue was essentially flat in Q3 and down 3.4% year to date; excluding currency effects, it increased 4.0% in Q3 and was flat year to date.
- Q3 gross margin improved primarily on Sporting Goods product mix. Year-to-date margin declined slightly; management reported a 9% year-to-date margin decline in Information Security and Print Finishing.
- SG&A was $7.466 million in Q3 and $23.729 million year to date, versus $8.725 million and $26.064 million in the comparable 2011 periods. Prior-year SG&A included $2.2 million of accelerated depreciation associated with replacing the Oracle ERP system.
- Q3 operating results included $13.362 million of goodwill and intangible impairment charges. Excluding those charges, management reported operating income of $3.0 million for Q3 and $8.4 million year to date, compared with $1.4 million and $6.1 million, respectively, excluding 2011 accelerated depreciation.
- Cash from operations was $7.271 million for the first nine months, versus cash used of $1.044 million in 2011. Capital expenditures were $1.831 million. Cash and cash equivalents declined $0.566 million to $3.255 million; time deposits were $1.200 million.
- Total bank debt was $19.533 million at October 6, down from $21.947 million at December 31, 2011 and $25.629 million a year earlier. Total assets were $124.187 million and stockholders’ equity was $77.302 million. The company had $40.662 million of current liabilities and $72.369 million of current assets.
Material changes and unusual items
- The company impaired all $13.187 million of goodwill in the Martin Yale Group reporting unit, within Information Security and Print Finishing, and recorded approximately $0.2 million of related intangible impairment. Management cited lower-than-expected profits and cash flows, increased competition, and continued weakness in European and Asian markets. The impairment used Level 3 valuation inputs, including five-year cash-flow forecasts and an 11.2% discount rate.
- A $0.382 million other-than-temporary impairment was recorded on the Escalade International joint-venture investment after customer attrition and weak performance. The company was negotiating a sale for less than book value; the investment was written down from $0.9 million to $0.5 million. The transaction was not reported as completed.
- Stiga Sports, a 50%-owned joint venture, contributed $1.4 million of the company’s nine-month other income, compared with $1.6 million in 2011. Escalade International contributed a $0.137 million loss, versus $0.058 million income.
- The nine-month tax provision was $4.343 million despite a pretax loss, reflecting, among other factors, the impairment charge’s nondeductibility and valuation allowances on losses in foreign jurisdictions. Management expected the 2012 effective tax rate to exceed 2011’s.
Liquidity, outlook, and risks
- The amended revolving credit facility provides up to $22 million and matures July 31, 2013; the $8.5 million term loan matures May 31, 2015. The company also has a €2.0 million overdraft facility, with $2.4 million outstanding at October 6. Management expected adequate revolving-credit access for working-capital and growth needs.
- Management expected full-year Sporting Goods sales growth to remain in the double digits, while Q4 growth would be below Q3’s unusually strong rate, partly due to timing of product placements. No specific consolidated earnings or revenue guidance was provided.
- The company adopted a quarterly dividend policy targeting $0.08 per share, subject to board review of financial condition, outlook, cash flow, and financing needs. A further $0.08 dividend was declared November 9, payable December 20, 2012.
- Disclosed risks include competition and pricing, demand and product acceptance, customer and supplier relationships, economic conditions, foreign exchange, cost control, financing access and covenant compliance, and integration of acquired businesses. The business is seasonal, and interim results may not indicate full-year results.
- No derivatives were in use during the quarter. Management stated that a hypothetical 1% interest-rate change would not significantly affect financial position or results. Management concluded disclosure controls were effective and reported no material changes in internal control over financial reporting during Q3.
Key facts for investors to verify
- Whether Sporting Goods growth and the expected double-digit full-year pace persisted after Q3, given the stated timing effects and anticipated slower Q4 growth.
- Whether Information Security and Print Finishing performance stabilized after the substantial goodwill write-off, and whether actual results track the revised forecasts and valuation assumptions.
- Whether the proposed Escalade International investment sale was completed, and at what proceeds relative to the $0.5 million recorded fair value.
- Available borrowing capacity, covenant compliance, and refinancing plans ahead of the revolving facility’s July 2013 maturity.
- The sustainability of operating cash flow, elevated inventory, dividend payments, and the tax burden given the reported losses and foreign valuation allowances.